The Debt Ceiling Impasse: The Myth of Grand Bargains and Win-Win Unicorns

07/26/2011 01:20 am ETUpdated
Sep 24, 2011

As I write, there is still no deal in the debt ceiling impasse between Congressional Republicans and the president, so we can't say who "won." But we can definitely say who lost: America.

Even if we ultimately get the touted "Grand Bargain," and even if it's satisfying to both sides -- the "Win-Win" Unicorn that Obama is always fantasizing about -- it's not going to be grand for anybody who correctly identifies unemployment and our economy's anemic growth as the biggest crises we're facing.

Indeed, no version of the Grand Bargain we've heard so far will have any impact on the real problems that are affecting people's lives right now, or even in the foreseeable future. After the champagne has been uncorked and lots of backs have been slapped in DC, the lives of regular Americans will not be better -- indeed, they will almost certainly be worse. President Obama likes to say, as he did during his Twitter forum in early July, that "everything is on the table." But that was never true, because jobs and growth never even made it close to the table.

What's more, these extended, deadline-pushing theatrics are utterly unnecessary. There was no reason an agreement on the long-term deficit had to be coupled to raising the debt ceiling. The latter dates from the days of World War I, and has been raised, routinely, dozens and dozens of times. It was raised 18 times under Reagan. It was raised seven times under George W. Bush.

And, in fact, raising the debt ceiling has nothing to do with long-term future spending. The debt ceiling is about paying for spending already approved by previous congresses and presidents. An example? As Zaid Jilani reported, it was 10 years ago this week that the Treasury had to borrow $51 billion to pay for the first installments of Bush's tax cuts. As Jilani notes, Bush's two rounds of tax cuts combined "have blown a $2.5 trillion hole in America's budget."

This is from an AP report at the time: "The Bush administration said the need to borrow in the third quarter reflects a short-term cash squeeze and doesn't signal a move from budget surplus to deficit."

That, of course, turned out to be complete nonsense. But it is a pungent reminder that part of this spectacle going on in Washington involves Republican legislators refusing to pay for the very obligations -- including two wars -- they voted for in the past. Remember that the next time they lecture the country about "responsibility."

Indeed, the total Bush added to the deficit was almost $4 trillion and, according to the Center on Budget and Policy Priorities, Bush's two tax cuts and two wars will account for nearly half of public debt projected by 2019.

So, given that the debt ceiling is largely about the past, there was no reason to create an artificial crisis by linking it to discussions about long-term debt reduction in the future. As Standard & Poor's, which advised against the link, put it: "It's best practice for governments to enact [deficit] reforms ... using the broader and longer-term perspective occasioned by debate on the budget proposal as a whole."

The relentlessness with which most of Washington decided it was long-term debt that needed to be subject to round-the-clock meetings with drop-dead deadlines instead of jobs and growth is truly bizarre. I've never seen such a disconnect between the several hundred members of the Washington establishment and the real problems facing the majority of Americans. It's beyond the powers of an economist to explain what's happening -- what we need is a psychologist. It's like Tulip Mania combined with a Lost Decade -- or three.

On the one hand, we have a Republican Party that, as David Brooks wrote recently, is no longer a "normal party," but rather one that is being pushed by members of a movement with "no economic theory worthy of the name," and "no sense of moral decency." On the other hand, we have a president who looked across the aisle and said: Okay, I agree in principle, let's just sort out the details.

"Someday," Elizabeth Drew writes in her must-read premortem of the debt-ceiling battle, "people will look back and wonder, What were they thinking? Why, in the midst of a stalled recovery, with the economy fragile and job creation slowing to a trickle, did the nation's leaders decide that the thing to do -- in order to raise the debt limit, normally a routine matter -- was to spend less money, making job creation all the more difficult? Many experts on the economy believe that the president has it backward: that focusing on growth and jobs is more urgent in the near term than cutting the deficit, even if such expenditures require borrowing."

Here's the maddening part: if Congress and the president had focused on the crisis of jobs and growth, the solutions they would have come up with would also have been the best solutions to the long-term debt crisis. The fact is, you can cut all the discretionary spending you want -- but it's growth, not cutting, that will solve our long-term deficit problem. And you can't cut your way to growth. When adjusted for inflation and population growth, non-security discretionary spending is the same today as it was in 2001: $369 billion.

As the Guardian's Michael Burke pointed out, Greece is clearly demonstrating that even though it no longer has a spending problem, its crisis is as deep as ever because it has a growth and revenue problem. Spending in the year leading up to May was actually 700 million euros less than the IMF and EU had called for. But government revenues were down almost 2 billion euros because of falling tax revenues.

Draconian cuts take money out of the system, depressing demand, job creation, and tax revenues -- which leads to more deficits and more calls for more cuts. It's an insanity spiral. And we're currently, and deliberately, riding it downwards.

Interestingly, one of the most eloquent voices on the subject has been Larry Summers. "The biggest problem the country has right now is not the budget deficit," he said in a conversation with Walter Isaacson in Aspen. "The biggest problem the country has right now is the jobs deficit."

And he brilliantly summed up the reality that is eluding the negotiating parties in Washington: "an extra percent a year on the growth rate for the next five years will do more for the budget than any amount of the entitlement-cutting that's under discussion." As Summers explained on Charlie Rose, every new dollar of GDP takes 25 to 30 cents out of the deficit in year one. And yet that simple economic truth does not appear to be included in the "everything" that Obama claims is "on the table."

"It is crazy if you think about it," Summers told Isaacson, "that we have schools across this country where we tell our kids that education is the most important thing in the world, but we ask them to study in classrooms where the paint is chipping off the walls."

"I'd rather see us focus on the jobs deficit," said Summers. "I'd rather see us focus on the public investment deficit. I'd rather see us focus on the human capital deficit. Those are deficits that we need to focus on also."

Why do people have to leave office before they can unambiguously and unequivocally speak the truth?

As Peter Orszag, now also no longer in office, wrote for Bloomberg View, a sluggish-growth scenario would add $2.5 trillion to the debt by 2021, more than the $2 trillion in cuts being discussed in the debt-ceiling package.

And a way to ensure the sluggish scenario is to do exactly what they're doing in Washington right now. "I only ask... as Congress looks at the timing and composition of its changes to the budget," said Ben Bernanke to the Senate Banking Committee, "that it does take into account that in the very near term the recovery is still rather fragile, and that sharp and excessive cuts in the very short term would be potentially damaging to that recovery."

So why aren't we focusing on jobs and growth? Summers' admirably candid answer to Charlie Rose: because "those without jobs aren't in a position to contribute to political campaigns, and to a disproportionate extent are the people who don't vote."

But it's not like the circus that's rolled into Washington is particularly popular with the people who do vote, either. In the latest Gallup poll, only 16 percent said the deficit was the most important problem facing the country today. Almost twice as many said it was jobs, and more still said it was the economy in general.

Is it any wonder that people have lost trust in the political system and that the vast majority of Americans think we're on the wrong track?

In the meantime, the president is engaging in the cosmetic populism of ending tax loopholes for corporate jets (which he mentioned not once but twice during his White House presser last Friday). I'm all for ending tax breaks for corporate jets, but what we need is not small-time symbolic gestures, but the tools to -- as this president put it not so long ago -- "win the future."

Instead of winning the future, Obama is facing two bad choices: a short-term debt-ceiling extension or going into default (unless he's willing, which he doesn't appear to be, to invoke the 14th Amendment).

So why did Obama go along with the idea that a long-term budget agreement should be tied to the debt ceiling increase instead of using all that time, his bully pulpit, and his considerable rhetorical skills to make the case to the American people that our long-term deficit crisis should be solved with the most powerful means available: a growing economy that puts people to work?

By wanting to be the only reasonable guy in the room, Obama is now facing two very unreasonable choices. And it was all entirely unnecessary. Regardless of who scores a political win as a result of this game of debt ceiling chicken, America is the real loser.